2 top investment ideas from Kunj Bansal for 2022

view original post

“Sectoral outperformance is coming from the pharmaceuticals and IT, from capital goods and infrastructure space and some specific sub segments like gold finance companies, housing finance companies and realty and realty related sectors, ” says Kunj Bansal, CIO, Karvy Capital.

What is your takeaway on how should we brace ourselves for the year ahead?
Before I talk about the year ahead, remember till about two months ago, we were in line with the global or rather the US market. But because of the last two months’ correction of almost 7-8% from the October peak, we have now underperformed on a year to date basis or on the calendar year 2021 basis. We are now roughly lower around 18-19% on the year return. Let us see how today goes and whereas the US market the Nasdaq, S&P etc. are 20% plus. So it is a good correction that has happened in the last one and a half months because that gives a base.

So, let us not forget that even then, we are at a reasonably high base. Even if we take our own market, over the last one and a half year or two year basis, valuations have also been on the higher side in terms of standard deviation of the average valuations.

To add to that, the September quarter numbers clearly showed margin pressure because of the increasing raw material prices. The same is likely to reflect in the December quarter as well. So while sequentially there may not be any dip and even be an improvement because from last quarter to this quarter, some of the commodity prices have corrected, on a year-on-year basis, we are still going to see that pressure remaining.

Of course, with the third wave looming large, we could see slowdown in some pockets. If I take a mix of these two, although it is always difficult to predict date to date performance, we need to continue to be ready for correcting the range-bound movement of the market in the initial period. Budget trigger will come on February 1 and going forward, we have to wait and watch as things shape up.

I was just looking at the sectoral performers year to date and it has been the commodity cycle which has held out smartly. Nifty Metals for instance has given a whole lot of gains A lot of other sectors have also contributed to the rally. The relative underperformers have been Nifty Bank while FMCG and pharma gave a more muted performance. With Covid threat looming large, is there a chance for pharma to play catch up?
While Nifty Metals index on a calendar year basis looks like an outperformer, almost all of its outperformance came in the first half of the calendar year. If I look at the second half – July till date – the performance has been flat to marginally negative. As against that, the surprise outperformer has been Nifty IT which has continued to go up one way and has been consistent almost all the 12 months.

Capital goods/infrastructure is another space that has been outperformer. In fact, we can add realty also among the outperforming sectors. BFSI was a complete underperformer which was not in line with the broad market expectation.

Whenever there is a market correction or a consolidation, the defensives outperform. In the last one and a half month correction, we have seen outperformance from FMCG, probably a little bit of absolute returns and some outperforming returns from pharma. , a little bit of absolute returns along with the outperformance. IT, of course, has been an outperformer all throughout. Now going forward, because of Omicron and things like that, we see that the market will remain range bound because it has already risen so much in the last one and a half years. Valuations are high and though the earnings are not going to support as much, they will not be bad. There will not be any de-growth but the growth rates will come down because of the high base and margin pressures.

We have to keep in mind that the interest rate hike looms large in the coming year though may be not in the first half, especially with the third wave having come in. We might see a consolidating to correcting market and if that happens, defensives will outperform. Among them, I am still not as hopeful on FMCG because the growth is likely to be lesser and there will be margin pressure. We will have to continue to wait and watch but pharma should certainly continue to outperform. IT having outperformed will continue to outperform further. Within defensives, these are the two sectors that will outperform.

Do you think in times to come, one will have to have exposure to cryptos and NFTs?
I see a lot of people from tech, manufacturing and other spaces commenting on the equity market as if equity market is something everybody finds very easy to understand. So I would resist that urge to comment on the other asset classes but yes, I will try to approach your answer from a wealth management, an individual’s investment portfolio over the longer term point of view. It is indeed a part of the emerging trend and it will continue to be that the newer asset classes or newer investment opportunities will keep emerging.

So yes, maybe not in the immediate next year, but in the next four-five years, one should have other asset classes. As I said I would not comment on the asset class of crypto or NFT because I do not understand them, but still from the point of view of diversification, from the point of view of sustenance of return that these new asset classes give, investors should have the open mindset to diversify a part of their portfolio into these more exotic investments.

In order to end the year like 2021, what is the big idea for 2022?
My sectoral expectations of outperformance are coming from the pharmaceuticals and IT, from capital goods and infrastructure space and some specific sub segments like gold finance companies, housing finance companies and realty and realty related sectors.

If I come to one or two investment ideas, one is Divi’s Laboratory in pharma. Although one can keep discussing its valuations till cows come home, the stock is available at almost 20% correction from its peak! You do not get such good quality stocks at a correction more than this unless the market corrects really sharply. Another stock idea from gold loan finance companies is

. It is a company with excellent financial numbers trading at a forward price to book of around 3x with return on assets going close to 5-6%. Again the stock has corrected. Although the largecap index has only corrected 7-8% or so, quite a lot of good quality stocks have corrected 15-20%. These are some of the investment ideas going forward for the medium term.